Why the Left Misunderstands Income Inequality

America emerged from the Great Depression and the Second World War with a much more equal distribution of income than it had in the 1920s; our society became middle-class in a way it hadn’t been before. This new, more equal society persisted for 30 years. But then we began pulling apart, with huge income gains for those with already high incomes. As the Congressional Budget Office has documented, the 1 percent — the group implicitly singled out in the slogan “We are the 99 percent” — saw its real income nearly quadruple between 1979 and 2007, dwarfing the very modest gains of ordinary Americans. Other evidence shows that within the 1 percent, the richest 0.1 percent and the richest 0.01 percent saw even larger gains.

By 2007, America was about as unequal as it had been on the eve of the Great Depression — and sure enough, just after hitting this milestone, we plunged into the worst slump since the Depression. This probably wasn’t a coincidence, although economists are still working on trying to understand the linkages between inequality and vulnerability to economic crisis.

The growth in income inequality seems to be largely an outgrowth of giving banks a monopoly over credit creation. In 1971, Richard Nixon severed the link between the dollar and gold, expanding the monopoly on credit creation to a carte blanche to print huge new quantities of dollars and give them to their friends.

Unsurprisingly, this led to a huge growth in the American and global money supplies. This new money was not exactly distributed evenly. A shrinking share has gone to wage labour.

However the dominant explanation on the left is that this is down to the tax structure. I can’t falsify this theory, because the data supports it:

But why has the government chosen to tax corporations less, and payrolls more?

Who owns the government? Political donors — they finance the political system. Before one vote is cast candidates tailor their platforms to meet the criteria of donors. Who are political donors? Well, they are people with spare capital to expend in the name of getting politicians elected.

Here’s a side-by-side comparison of the presumptive 2012 Presidential nominees:

(Even bigger money flows through the Super PACs. A full breakdown of Super PAC donors can be found here; the same donor profile emerges).

So who are the biggest donors? Banks & large corporations: the very people who have benefited most from the post-1971 tidal wave of fiat credit creation.

So not only has an exorbitantly high proportion of new credit gone into corporate and financial profits, but the beneficiaries have used these fruits to buy out the political system, thus ensuring that they keep an even higher proportion of their incomes, while making up for this slump with greater borrowing, and greater taxation of payrolls.

The political left — epitomised, I suppose, by the Occupy movement — often call for “taking the money out of politics”. By this, they seem to mean holding elections that are not funded by private money, where all candidates are given the same resources. The reality of this, of course, is that such a measure would require a change in the Constitution, as privately-funded political advertising is protected speech under the First Amendment.

But let’s assume — just for the sake of argument — that a law “taking the money out of politics” could be enacted by simple majorities in the House, the Senate, and a Presidential signature (after all, President Obama’s legislative program has not maintained much respect for the original intent of the U.S. Constitution). Even under those implausible circumstances, why would Congress pass such a law when the entire political system is dominated by financial donors who want their money to very much be in politics? After all, it is not just for the sake of tax avoidance — government largesse produces lucrative contracts for contractors. The more money the government has to redistribute, the more incentive there is to spend money to get your people into office redistributing it, and government has more money to distribute — both in absolute terms, and as a percentage of GDP — than at any time since World War II.

The other (and simpler) proposed solution from the left is raising taxes on the rich, so that they pay a “fair share”. There are two problems with this. Firstly, that raising taxes during an economic depression is contractionary, and will (like the misguided and destructive European austerity programs, which of course include tax hikes) depress economic conditions further. And even if this was a good proposal (it isn’t), the political class will fiercely resist such proposals. Today, the Democratic-controlled Senate voted down the so-called Buffett Rule, that would have imposed a 30% floor on taxation for incomes over $250,000. (Buffett — as a top recipient of Federal Reserve bailout cash — would have no problem paying such a rate, unlike those far poorer than him who never took a penny of bailout money. Buffett would do well to spend less time in the bath thinking about Becky Quick, and more time using his capital to create jobs, to end this depression.)

Now the capitalist system has been corrupted. The managerial state has assumed responsibility for looking after everything from the incomes of the middle class to the profitability of large corporations to industrial advancement. This system, however, is not capitalism, but rather an economic order that harks back to Bismarck in the late nineteenth century and Mussolini in the twentieth: corporatism.

In various ways, corporatism chokes off the dynamism that makes for engaging work, faster economic growth, and greater opportunity and inclusiveness. It maintains lethargic, wasteful, unproductive, and well-connected firms at the expense of dynamic newcomers and outsiders, and favors declared goals such as industrialization, economic development, and national greatness over individuals’ economic freedom and responsibility. Today, airlines, auto manufacturers, agricultural companies, media, investment banks, hedge funds, and much more has at some point been deemed too important to weather the free market on its own, receiving a helping hand from government in the name of the “public good.”

The costs of corporatism are visible all around us: dysfunctional corporations that survive despite their gross inability to serve their customers; sclerotic economies with slow output growth, a dearth of engaging work, scant opportunities for young people; governments bankrupted by their efforts to palliate these problems; and increasing concentration of wealth in the hands of those connected enough to be on the right side of the corporatist deal.

A realistic program to “take the money out of politics” — in other words, to return America’s form of government to its original constitutional intent, like the program advocated by Ron Paul — would do a lot to decapitate corporate power and the military-industrial-financial-corporate complex, who are mostly dependent upon government largesse, favourable regulation, bailouts, and moral-hazard-creating fictions like limited liability — for their very existence. But that won’t fly with either the political kingmakers, or the welfare-loving hordes of voters (and often for good reason — many of us have paid taxes toward welfare all our lives, and don’t want to lose out of something we have paid for).

The real conclusion of this is that the status quo is not sustainable. Corporatism and oligopoly is almost never sustainable, because of the dire social consequences. Today, almost 20% of young people are unemployed, wasting on the scrapheap. The median net worth of the young is lower than it was 30 years ago. The number of long-term unemployed has spiked to an all-time-high. Prison populations are at all time highs — and the highest in the world, both proportionally, and in absolute terms. America’s former industrial belt rusts; American manufacturing (what’s left of it) has often been reduced to re-assembling foreign components. America is heavily dependent on foreign oil. The American imperial machine is suffering from a lack of manpower. America’s strengths are melting away in a firestorm of misguided central planning, imperial waste, and corporate corruption. America’s social culture is fiery and combustible and individualistic. Young people denied opportunity by a broken system will do something about it. Occupy Wall Street and the 2012 Ron Paul Presidential campaigns were the first manifestations of the jilted generation dabbling in politics.

The political left misunderstands the causes of income inequality — confused by the belief that government can somehow challenge the corporate and financial power it created in the first place — and thus proposes politically unrealistic (non-) solutions, particularly campaign finance reform, and raising taxes on the rich and corporations. Yes, the left are well-intentioned. Yes, they identify many of the right problems. But how can government effectively regulate or challenge the power of the financial sector, megabanks and large corporations, when government is almost invariably composed of the favourite sons of those organisations? How can anyone seriously expect a beneficiary of the oligopolies — whether it’s Obama, McCain, Romney, Bush, Gore, Kerry, or any of the establishment Washingtonian crowd — to not favour their donors, and their personal and familial interests? How can we not expect them to favour the system that they emerged through, and which favoured them?

In reality, the system of corporatism that created the income inequality will inevitably degenerate of its own accord. The only question is when…

102 thoughts on “Why the Left Misunderstands Income Inequality”

I wouldn’t call this a theory, it’s pretty much what happened. But to be thorough, it was more complex than you apparently make it sound; I understand it as a complex process that evolved over time: government enterprises that should have long crumbled got a new lease on life, and then got further entrenched, ossified and ramified being fed by an apparently endless spigot of money. And of course, a new class of rich people appeared over time, one that became rich not for their own merits but more as a result of their connections with the insiders.

80% of what I wrote above came to me by way of Bill Bonner. Your way of thinking is surprisingly similar to his, and it’s a pity you don’t feature him more often, or don’t have him in your blogroll (so that more people can find their way to his wise writings).

He writes almost daily at the Daily Reckoning (which belongs to his own Agora Financial): http://dailyreckoning.com/author/bbonner/ (this shows only his posts though it doesn’t appear as a regular blog). Now you decide what you do with your own blog, my statement came from the fact that I noticed he’s probably the one closest to your way of thinking than any other in your blogroll.

I agree. The Australian housing boom was influenced by cheap credit, obtained bt the elite, at the expense of the poor and financial illiterate. Once the house prices reached heights that encouraged wholesale adoption of “Investment” loans by the masses, it was too late. The price inflation was crystallised by the “Connected”. Ponzi scheme!

The big factors are taxes, specifically the payroll taxes that are regressive taxes against the poor. this has increased from 6.4% of the GDP in 1970 to 15.7% today. The SS and Medicare tax is responsible for much of the taxes on the middle class and poor.

Additionally illegal immigration disproportionately affects the poor and helps the rich, going from 4.7% foreign born to 12.4% today means there are millions of illegal blue collar workers driving wages down in america.

The reduction of the corporate tax actually HELP wages among the lower classes as there will be more jobs and opportunity. Replacing them partially with user taxes might not be a bad idea.

Inflation and going off gold is reason 101. Simply put, as I tell my students several times a semester, most people get pay raises once a year, owners of capital can raise their prices as much as they want to. Simply put inflation is the great divider between the haves and have nots and the reason the Rockefeller and Morgans wanted a central bank, soft money, and inflation so badly. McKinley was killed because of this.

Keep thinking and read your Rothbard, Mises, and Gary North once in awhile. I know it must be frustrating to have graduated a top economic university and have so many holes in your education. Keep learning.

I do not necessarily agree that cutting corporate taxes is more helpful to the lower-income echelons of society than the payroll taxes. Certainly, corporate taxes are at their lowest ebb in a hundred years as a percentage of GDP and unemployment, youth unemployment and long-term unemployment are close to their highest ebb.

Certainly, switching from corporate to payroll has constituted some degree of a transfer of wealth between the lower-echelons and the upper-echelons. There is a very strong correlation, in fact, between these two variables, so I think it is incorrect to try to contend that the two are not related.

Ideally we would have a low-income tax environment for everyone, but the reality of spending in the last 40 years has meant that there has to be a taxation structure to pay back the debt, and I would rather it came from idle money (those who would otherwise buy treasuries) than from payrolls.

As for immigration, I personally believe that immigration is very good for America. America is uncompetitive because of the problem of agglomeration; industry and supply chains are agglomerating in the most densely populated areas of the world, which are not in America but India and the Eastern seaboard of China. To become more competitive in the 21st Century, America needs to attract more immigrants and grow its population. However, I certainly favour legal, and not illegal immigration, because as you correctly say, this creates an excess (and thus a price floor) of ridiculously cheap non-unionised zero-rights labour.

I liked your post, except for the snarky last paragraph, which was uncalled for and classless.

Also, I would like to point out that globalization has much to do with the current predicament we in the West find ourselves in today. I think that not adding globalization to your list, perhaps even at the top of the list, mutes the impact of said list.

If someone is going to accuse me of being an economics graduate from a top university, they would do well to actually read the post where I wrote:

I am a college dropout.

However, I do pride myself on the fact that I read most of the establishment blogs (when I can stomach it) and a lot of academic papers, and am maths literate. If I pass as part of the establishment even while I spew all this fucking anti-establishment dissent, well, then I suppose that is a credit to me.

Also, I don’t know what Mark is so annoyed about. I have always been praiseful of his work — even when I do not fully agree — and even encouraged him to submit it to Zero Hedge.

Quote: “Here is evidence, a letter from a former slave to his former master, written only a few years after the War Between the States came to an end. We don’t know, but it is unlikely the former slave had any formal education. But you will notice that today’s typical university graduate could not match his clear thinking or his polite, funny, sarcastic style”

Contemporary education is a dead end. The industry has been taken over by zombies. Huge amounts of money — public, private, charitable, debt, savings, earnings — are invested. The output is small, dubious and perhaps even negative.

We know that in some fields, such as economics, the more instruction a person has, the less he knows. Economics — as taught in many universities — is a value-subtracting discipline. As to other fields — politics, sociology, literature, gender studies — we are suspicious.

We have also noted that despite huge increases in per capita, inflation adjusted spending over the last 40 years, test scores have not increased. This suggests that the money was wasted.

Globalisation only reveals the weakness. If these were sound economies, easier trade would mean more wealth. It’s impossible to be harmed without violence. If someone comes that can produce X so much cheaper and at the same quality – it just means much more X available. Current X producers have to adapt, but it is nothing “bad”. This is the essence of economy, adapting to changes and constant improvement. Only those who are already obsolete and refuse to adapt need to entrench themselves with tariffs, copyright, immigration barriers, limited trade etc.
Discovery of farming was number 1 cause of decline of hunting and gathering and forced many out of their jobs, as cheap food flooded the markets. Was this a bad thing?

“Keep thinking and read your Rothbard, Mises, and Gary North once in awhile. I know it must be frustrating to have graduated a top economic university and have so many holes in your education. Keep learning.” “4. Corporate taxes eliminate them
6. But a flat or fair tax would be preferable”

Riiighhht. And you actually teach this bullshit you condescending twit?

Ummmmmmm…. This is nothing but religious dogma. None of this shit is good for anyone save for the wealthiest people. If you think otherwise your head is up your ass or you are lying.

How does eliminating a corporate tax benefit anyone but wealthy CEOs who already pay less in real taxes than their secretaries?

How is a flat or fair tax fair or just when the assholes advocating for such are making record profits from scamming and robbing people? When wealth is redistributed from the bottom up, how is that fair?

Jon, whilst I agree with you that lower coprporate taxes and international transfer pricing (no tax paid, except in the Cayman Islands at 0.1%) is unacceptable for big business, a flat low corporate tax rate for small businesses will encourage risk taking and business innovation.

We have to make it worthwhile for people to risk their savings going into business if we are going to get innovation. But at the same time inherited wealth should be taxed somewhat. Why should your middle class parents hand you a windfall. Because you were lucky to be born into the family. How does that motivate you to get ahead? Me I have no inheritance, so I am peddling as fast as I can to build wealth. I will spend my wealth and my children can earn it like I did. Tough love.

Abolish Corporate welfare and tax inheritance. Watch the Capita being spent and re-deployed in the economy. It might even lower unemployment. You can’t take your wealth to heaven, and when you can’t give all to your children it is spent and recycled into goods and services that consumers want. Not what the government directs.

From my experience with people on the Political left, they are mostly comprised of Government workers, “Leaders” of not for profit businesses (NGO’s), or Union officials.

They are more concerned with their generous positions of power (And Benefits – Job for life and above average incomes)

Not income inequality. Being human, their selfish interests come first. I admit some may be extremely benevolent, but on the whole, they are like a cancer on society. Their gain is someones loss. Usually at the expense of job mobility and employment.

As Adam Smith said in 1776, a Laborer could support a wife and 5 children with income to spare, driving the new industrial world (The beginnings of consumerism). They can’t in today’s times. What was the cause? The policy of the Left.

Feeding the dependent class is only one part of this problem. I’ve read a good passage on the responsibilities of both sides of political divide it went something like this: The left wanted to cartelize workers, while the right wanted to cartelize business, they compromised and cartelized both.

I reckon the left understands this problem perfectly well, and also understands that raising taxes on the rich and on corporations is the main answer, despite there being practical problems associated with it.
I don’t for a moment accept Mark’s argument that low corporation taxes benefit the poor. After tax profit margins aren’t zero-sum, and lower corp taxes have demonstrably NOTcreated more jobs and oppotunity, at least not in the western world. Most of that money seems to be sitting idle in Mitt romney types bank accounts’ in the Cayman Isles, not creating wealth and jobs. Furthermore, inflation is broadly re-distributive if anything. It hurts creditiors and benefits borrowers. You get rich debtors, and rich lenders, but you tend not to get poor creditors. A steady 3-6 percent inflation is fine as long as wages keep up. And a flat tax? Oh please.

As for money and politics, only in America is hard cash so important in the election process. Sure, money moves toward power and vice versa, but in most of the democratic world it doesn’t dominate like in the States.

To my friends and readers on the left I say good luck in your campaign to try and raise taxes on the rich to a pre-Reagan level . I believe in personal responsibility, and seeing as it is the rich who get the most out of government (wars, bailouts, etc) I believe that they should pay the most for it.

However I highly doubt that this will really solve the problem without somehow curtailing the financial system’s ability to print money and give to anyone they like, and I highly doubt it is politically possible.

Ay, well, it’s difficult to see it improving much in the States, anyway. The ugly society is too deeply embedded. They’re going to end up voting for a leveraged buyout 0.1%er after a half decade of money printing for the 0.1%, and feeling like righteous insurgents while doing it.

It the same thing over here, unfortunately. There are a few different ideas here and there, but its only about who’s going to pay. How does it solve the problem of first getting into such a position? In Iceland banks went down the drain, in Ireland govt took over their debts, Greece is a basket case forced into austerity, Spain claws away desperately slowly loosing it’s footing, France and UK pretend everything is all right. But the paradigm is still to save the nation-welfare State. These are adjustments to make it over this crisis. Fundamental policy is not in question and Keynsian alchemy of economy is in fashion (majority believes nonsense like “good inflation” and the rest of that crap). Entire EU is also going down. Only thing to stop this would be USA crumbling soon. Going down really hard with blood in the streets and maybe some lynched politicians – this would be a stimulant for rulers of EU to really rethink basic issues. Right now they might rollback a few % points of size of the govt, this will never solve anything.

I really enjoyed reading this post and the comments and agree with your premise that corporatism (with big government as an enthusiastic partner) is the principal problem. I would add higher education as an addition player. What is the explanation of 5 of the 20 donors listed for Obama being universities and the government?

And a shockingly vast bubble at that. Why they bother is beyond me, leaving uni with a degree in English and debts equivelent to buying half a flat. Student debt is set to be a huge drain on spending power throughout the world over the next couple of decades.

The question I keep asking and that must be answered before a rational discussion can tke place is; “What is a “”Fair Share””?”.
Without a definition that has a handle on it so that it can be manipulated [numbers crunched] there is no rational basis for discussion as the target keeps moving.
High minded sounding rhetoric will keep the masses soothed right up to the point where everybody realizes that the emperor, not only has no clothes but that he is using Bandini Mountain for a podium. When that happens the Bandini will definitely encounter the rotary distribution system.

Agreed. And may I add my fair share is a little unfair to me because I had to pay a % of my Pre Tax Share, with a bunch of Government workers. So in effect, the Government workers have an unfair share.

This period if increasing disparity between the upper class vs. the middle class is a necessary condition (and temporary) for future growth. It is called the echelon effect. The upper class must advance first thereby pulling the lower classes along later. Study history and you’ll see. An anolgy would be an explorer encountering a very advanced society. He and his country of origin stand to benefit greatly from learning from the new society. If he discovered a civilization on par or inferior to his own, there is nothing to gain. We are going nowhere as a whole if we don’t let one group break out for the later benefit of the group. It’s one big bike race.

I basically agree with the article, especially the last paragraph, but I quibble with this:

However the dominant explanation on the left is that this is down to the tax structure. I can’t falsify this theory, because the data supports it:

The graph doesn’t support that. We’ve essentially lost our mid-size and small corporations to overseas suppliers. If corporate taxes were so low, especially for the size of corporations that don’t have lobbying clout, we’d be seeing a boom in jobs over the last 30 years. Basically what’s happened is we’ve seen is the federal government’s spending balloon at the expense of smaller corporations – who either move overseas or more likely cease to exist with no new companies taking their place – or individual citizens who can’t move (nor cease to exist) as easily.

Also the graph only shows federal taxation – we need to see the same graph for each state and the larger municipalities. For example, illinois has a flat income tax and a sales tax, plus many municipalities levy further sales taxes. The typical total sales tax in Northeast Illinois 40 years ago was 5%, it is now 9% – the rate has almost DOUBLED. The income tax was 2% 25 years ago and is now 4.5% which is MORE than DOUBLED. So corporations find it more cost-effective to lobby at the federal level for tax breaks than trying to lobby in multiple states to prevent increases or ask for breaks.

The current mess is the result of thousands of well-intentioned but poorly-thought policies and plans. As I like to say, if people mean well but are too lazy to think things all they way through before making decisions and taking action, they they really didn’t mean all that well.

State Taxes. Good points. As I eluded to above, lower taxes on Small and Medium companies would drive innovation. Owners of capital would be prepared to risk it by investing. Instead of getting an easy risk free 6% (If the know someone at the Fed)

I’ve seen it elsewhere referred to as corporate statism, which I think is a more accurate term. It also enables the inclusion of entities that are not necessarily corporations, as implied in your lists of donors. There’s no doubt about it, it’s democratically corrupting and is reality.

No one seems to see that Congress began spending heavily in the late 1970’s, money they didn’t have. To avoid a confrontation with voters they never taxed anyone enough to cover the expenses and just borrowed it. It makes no difference if they spent on guns or butter. Had they taxed any or all American’s or business close to what was required the economy would have slowed, programs would have been cut, and Congress would have been reshuffled.

We all have enjoyed the financial ether: Life became wonderful with lots of new industries, new jobs and wizard technologies, all hinged on a lie: we were paying for this and it is sustainable.

They now tell us it is the rich and the corporations that don’t pay enough. True, but understand no one has been paying enough for about 40 years. It was always easier to borrow, avoid confrontation, and be reelected. As it takes half about dozen private workers paying taxes to pay for one government employee, government is the only unproductive mouth at the table. And it desperately wants to sit at the head of the table, carving the turkey.

Today about half the country is being told they don’t have to pay at all, because they are now too poor, supposedly because just 1% or 2% of the country hasn’t been paying enough. Our obliging Congress will silently borrow or print their share, and for another year avoid any confrontation. (Corporations pay the highest rates in the world, so maybe they have been paying close to their fair share.)

We continue to believe what we’re told; that it is someone other than Congress who has brought us here. Congress is the only one who has nefariously failed to tax enough to cover their expenditures. Certainly they didn’t want the political fallout associated with living approximately within “our” means: Ideologies would have suffered. Your politician will continue to hold the carving knife and decide who gets served first and how much. Sadly, that just ain’t America, but so many are so hungry now, they just don’t care anymore.

I know you tend to find broad labels like “liberal” distracting from the issues, and I generally agree. I use the labels to illustrate a point either way.
The vast majority of the wealth of the country is owned by a tiny minority. All the other problems come from that. – The Liberal

Post hoc ergo propter hoc. It’s not the concentration of wealth that is the issue, it’s the environment which dictates through coercion the funneling of money to the “self-proclaimed” elite at the top. – The Libertarian

Rather than “us vs. them”, “rich vs. poor” ranting, what seems to be missing is acknowledgement that the most energetically growing economies (India, China) are characterized by the emergence of a vigorous middle class in the past couple decades. Post-glasnost, this was true also of Russia; what has happened since the rise of the oligarchs? And what is happening to the US middle class?

The middle class is where income equality (the land of opportunity) is realized. So long as the oligarchs of the US drive the national conversation, equality will continue to decrease, and with it the general viability of the economy.

We are not handling this issue right.
The discussion should NOT start with “income inequality”. That is the END-POINT of a process.
We should start the discussion with inequality of CONTRIBUTIONS.
What is one bringing to the table … ?
What is one contributing to the advancement of this society?
Then work our way down to incomes generated.

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